Sobeys sees solid start to fiscal year

Sobeys Inc. parent Empire Company Ltd. tallied food retail sales gains in its fiscal 2020 first quarter, with earnings per share in line with analysts’ estimates.

For the quarter ended Aug. 3, food retail sales rose 4.4% to $6.74 billion (Canadian) from $6.46 billion a year earlier. Stellarton, Nova Scotia-based Empire attributed the increase to a strong performance across the business, the Farm Boy acquisition and positive internal food inflation, partially offset by lower fuel prices.

Same-store sales excluding fuel grew 2.4% year over year, compared with a 1.3% uptick a year ago. Empire and Sobeys President and CEO Michael Medline said comparable-store customer traffic and basket size also were up in the quarter.

“We have lapped the health care reform impact last year, which rendered the impact of pharmacy same-store sales immaterial this quarter,” Medline told analysts in a conference call yesterday. “Internal inflation was approximately 3%. We saw a dip in tonnage with a slow start to summer weatherwise, notably in May, and that appeared to impact the whole market, especially in Eastern and Western Canada. Temperatures were nowhere near seasonal norms and affected summer seasonal categories like cold beverages, ice cream, condiments and summer fruit.”

Related:Sobeys to eliminate plastic grocery bags at all stores

Gross profit for the first quarter climbed 9.8% to $1.66 billion, which Empire said stemmed mainly from increased sales, the inclusion of Farm Boy results and category reset benefits, partly offset by store closures in Western Canada.  Meanwhile, gross margin edged up 24.6% from 23.4% from a year ago.  Operating income totaled $254.4 million, up from $152.4 million in the prior-year period. 

“All in all, I thought our team did a good job on comps, and as you can see from our margins we didn't buy sales,” Medline said in the call. “In fact, we were purposely a little less promotional this summer as our promotions continue to become more effective. This gives our customers a great experience with a more relevant offer, provides a good lift for us and reduces the amount of money we spend on promotions.”

At the bottom line, Empire’s first-quarter net income came in at $130.6 million, or 48 cents per diluted share, compared with $95.6 million, or 35 cents per diluted share, a year earlier. Results were impacted in part by the switch to IFRS 16 leases, as the quarter represented the company’s first reporting period with the new standard. Adjusted net earnings were $133.9 million, or 49 cents per diluted share, versus $100.2 million, or 37 cents per diluted share, the year-ago quarter.

Related:Sobeys unveils more Safeway-to-FreshCo conversions

Analysts, on average, projected adjusted earnings per share of 49 cents, according to Zacks Investment Research.

During the first quarter, Empire expensed $21 million in store closure and conversion costs. Ten Safeway stores in Western Canada were converted to the FreshCo banner, while two other company locations were converted to Farm Boy stores.

Overall, Sobeys plans to convert up to 25% of its 255 Safeway and Sobeys supermarkets in Western Canada to FreshCo locations over five years. Almost two years into the effort, the company is on track to open about 65 stores.

Twenty-two FreshCo stores have been confirmed thus far, with seven open now in British Columbia and Manitoba, 11 more to open later in fiscal 2020 in British Columbia, and another four due to go into operation in Saskatchewan in fiscal 2021. The latest stores under the banner include the new “FreshCo 2.0” look, designed to enhance the discount grocery shopping experience.

“We are pleased with how the stores are performing and that our customers are excited. Our marketing team has done a great job driving awareness, and we'll continue building the FreshCo brand in the West,” Medline said in the call.

“Our strategy to grow share in Ontario, where we have historically had a low market share, continues to progress well,” he added. “We are seeing stronger results in our existing Sobeys, FreshCo and Foodland banners, and we continue to see improved sales and customer metrics as we convert all FreshCo stores to the new FreshCo 2.0 model.”

A fresh market format, Farm Boy also is a linchpin of Sobeys’ retail expansion, Medline noted. The banner, acquired in December, now has 28 stores in Ontario.

“Our acquisition of Farm Boy gives us a winning format that will allow us to accelerate our growth in urban and suburban markets on Ontario. Farm Boy has been part of Empire family for just over 10 months now and continues to build on its industry-leading operational and customer metrics,” he told analysts. “The team at Farm Boy is making progress against our plan double the size of the business in the next five years. We currently have concrete plans open another three Farm Boy stores in fiscal 2020 and two in the first quarter of fiscal 2021. Farm Boy's access to our Empire real estate prowess has allowed us to accelerate development of Farm Boy in high-quality locations.”

Sobeys also is moving ahead with its e-commerce strategy. Its first online grocery delivery offering, Voilà by Sobeys, is slated to get under way in the greater Toronto area in spring 2020, when its previously announced customer fulfillment center (CFC) in Vaughan, Ontario, begins operation. Next up in 2021 is Voilà par IGA, a delivery service in Ottawa and major cities in Quebec that will be served by a second CFC to be built in Pointe-Claire, Montreal. The Sobeys and IGA Voilà services and the Vaughan and Montreal CFCs will be powered by Ocado’s Smart online grocery platform.

“Winning the next generation of retail will require both extraordinary execution and smart strategic innovation in parallel with the strategic initiatives,” Medline said. “We are positioning the company to innovate for the long term. Mohit Grover, our new SVP of innovation and strategy, will join our executive team at the end of the month. Mohit will elevate the importance of data analytics and AI and drive innovation initiatives across the company.”

Through its Sobeys business unit, Empire owns, affiliates or franchises more than 1,500 stores in all 10 provinces under retail banners such as Sobeys, Safeway, IGA, Foodland, FreshCo, Thrifty Foods, Farm Boy and Lawtons Drugs, as well as more than 350 retail fuel locations.